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Internet radio royalty fight goes to Hill

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Rep. Jay Inslee, D-Wash., 1st District smiles after hearing the early returns as he talks to his supporters.
AP Photo

Radio webcasters plan to circulate through the halls of Congress Tuesday to shore up support for a bill Rep. Jay Inslee (D-Wash.) introduced last week that would affect royalty rates.

SaveNetRadio, a coalition of webcasters and artists, says a March 2 decision by the Copyright Royalty Board to raise royalty rates for Internet broadcasters would bankrupt most webcasters by arbitrarily raising their royalty rates from 300 to 1,200 percent -- well above the rates of satellite or cable radio. (Traditional broadcasters are exempt from the performance royalty but still pay a composition royalty to songwriters.)

The board, a division of the Library of Congress, considered testimony over 18 months before increasing the rates, which are set every five years. The decision affects rates retroactive to Jan. 1, 2006, and the first payment is due in mid-May. Inslee's bill would reverse it and let webcasters pay the same rates as satellite and cable radio providers.

"It's the killing of Internet radio," said Joe Kennedy, CEO of the popular webcaster Pandora.com. "As a country, we have a very rich and diverse set of musical interests; what Internet radio has done is provided a platform for both artists and listeners whose tastes are not mainstream Top 40."

On the flip side is SoundExchange, a nonprofit organization that collects royalties for artists and record labels. That group says Inslee's bill would benefit corporate webcasters at the expense of artists.

"The idea that this bill would help small webcasters or artists is ludicrous, since less than 2 percent of all royalty payments in 2006 came from small webcasters," the group's executive director, John Simson, said in a written statement. "The true beneficiaries are the mega-multiplex services like AOL, Yahoo!, Microsoft and Clear Channel, which will benefit from rates substantially lower than those set by the Librarian of Congress in 2002."

Both sides agree that the immediate consequences of the decision remain hazy. The decision goes into effect May 15, and SaveNetRadio says the legislation cannot pass the Senate and House by then. Officials from SoundExchange say they are eager to meet with webcasters to negotiate but think it's premature to discuss possible remedies, including a tiered approach for large, corporate webcasters versus small, independent ones.

Under the current system, webcasters with revenue of more than $1.25 million dollars a year pay about a penny per listener, per hour. Those that earn less annually could pay a percentage of their revenue, about 12 percent. The new structure changes the system to a per song, per listener rate for everyone, Kennedy said, tripling the rate for larger webcasters and imposing a 1,200 percent hike on smaller webcasters. Internet radio has grown into a dynamic medium, with about 50 million listeners per month, according to Arbitron Inc.

SaveNetRadio has recruited about 30 webcasters and about 15 bands and artists to discuss the issue Tuesday with members of Congress, capping off a traditional grass-roots lobbying campaign. It has also hired Qorvis Communications to help organize the coalition. So far, the group's 100,000 members have sent more than 400,000 messages to lawmakers, 1,000 broadcasters have sent 7,000 messages and more than 4,000 artists have sent 3,500 messages.

SaveNetRadio is trying to put together a bipartisan group of representatives and senators to push the issue. Inslee's bill is sponsored by GOP Rep. Donald A. Manzullo of Illinois. In the Senate, SaveNetRadio's lobbyists have approached Sen. Sam Brownback (R-Kan.), because he'll be sympathetic to the plight of Internet radio's many small Christian broadcasters.

"We are looking at that issue," Brownback said in an interview. "It's a really interesting set of technologies. My hope is to keep as much freedom going out there as you can, at the same time not getting monopolies that form up and control whole areas."

Kennedy said the rate increase for 2006 to 2010 amounts to a 300 percent hike, more than any small webcaster can afford. If something doesn't happen by May 15, most webcasters could be forced out of business, he continued, and the retroactive royalties alone could bankrupt small webcasters. Or, to stay alive, they could move offshore to avoid paying U.S. royalty fees.

"Large webcasters won't be instantly bankrupt, but there won't be a long-term business plan," he said. "There's slow death, and there's instant death."

SoundExchange contends that Congress created the royalty system at the behest of webcasters, and the system cannot be undermined now just because one party is disappointed with the decision.

In 2002, when the government first set royalty rates, webcasters criticized the decision even though the board imposed below-market rates so the industry could grow, SoundExchange argues. The recent rate change reflects the fair market value of music, especially since the rates have remained flat since 1998, when Congress established the board, they said.

SoundExchange also questions SaveNetRadio's claims about the size of the rate hike. The decision amounts to only a 5 percent increase over the earlier rate in 2006, and the rate for 2010 reflects an 8 percent annual increase in rates since 1998.

For example, the board set a "per stream" rate of $0.0011 an hour for 2007. So a person who spends 40 hours a month listening to one channel that plays 15 songs an hour would cost the webcaster 66 cents per month in royalties, an amount SoundExchange says is less than what webcasters could charge for subscriptions or recoup through advertising or merchandising.

SoundExchange says the bill would grant a windfall of more than $50 million to corporate webcasters at the expense of musicians, who would have to return royalty payments they have already received in some cases.

"Because the bill is so heavily favored to enrich the big webcasters, it raises questions as to who is really behind the SaveNetRadio coalition," Simson said. "Although this coalition purports to be on the side of musicians, they have come out in support of this anti-artist bill. SoundExchange has reached out to various webcasters to explore ways to accommodate their needs."

Readers' Comments (3)

Anyone who is at all familiar with the Internet radio advertising marketplace knows that, at the rates webcasters are able charge for audio advertising, an average of anywhere from 7 to 14 radio ads per hour would have to be sold just to pay the SoundExchange royalty. Then the webcaster has to pay ASCAP, BMI and SESAC musical works royalties. Add bandwidth, utilities, and other business expenses and pretty soon Internet radio carries more commercials than even terrestrial radio. And that's before making a penny of profit. So what are these extortion-level per-song rates really all about? In one word - control. With the vast majority of webcasters out of business, the four major RIAA record companies can go to the remaining few big streamers such as Yahoo, AOL and Clear Channel and offer royalty discounts to push the regular handful of songs to "hit" status. Think of it as the new payola and goodbye to a rich diversity of music enjoyed by more than 70 million Americans every month. The looming loss of independent Internet radio is a bi-partisan issue. It cuts across political party lines. HR 2060 "The Internet Radio Equality Act" needs and deserves your support.

I find it funny, in an ironic way, that SoundExchange claims this bill, if passed, will help "big webcasters." If the current royalty spike stands, those "big webcasters" will be the only ones able to afford the increased payments. In essence, Internet radio will finally go the way of terrestial radio - controlled by the few instead of the many. As is, with the content restrictions imposed by the DMCA, it's difficult enough for small broadcasters to get a foot in the door. (I know of whence I speak - from Aug. '05 to Aug. '06 I had my own station on Live365.com.) Unlike, say, the terrestial and satellite stations that feature hour-long (or longer) programs focused on the music of one artist - A-to-Z Beatles or Springsteen weekends, etc. - the DMCA disallows web broadcasters from playing more than three songs in a row from any one artist. Beyond that, though, it seems to me that the same restrictions and royalty rates should apply across the board. Thus, if SoundExchange is truly concerned about the plight of their artists, why not seek performance royalties from terrestial radio?

"The idea that this bill would help small webcasters or artists is ludicrous, since less than 2 percent of all royalty payments in 2006 came from small webcasters," the group's executive director, John Simson, said in a written statement." Read that carefully: in other words ONLY 2 percent of all royalty payments come from small broadcasters. Where does the rest come? Large webcasters who are playing major lable artists. This guy doesn't even SEE small webcasters. Just exactly how does raising small webcasters rates help them? And does hurting them help non major lable artists get their music out? Obviously it doesn't.